I know from personal experience that there are many thankless jobs on Wall Street, but the most thankless has to be that of the financial news headline editor. As the markets gyrate wildly, the front page headline is often out of date. At about 11:30 this morning, one headline read, "Dow rally fades, now up 100 points", when in fact the DJIA had just spiked to a gain in excess of 400 points. At its highs of the day the index had risen more than 800 points, so there is a strong temptation to just ignore it completely on any given day and chalk up market moves to "volatility." That would be an error.
I believe this market is offering up trading opportunities the likes of which have not been seen since early 2009. Note that I wrote trading opportunities. Investing opportunities are a horse of a different color, and while hindsight shows us that early 2009 was a great time for those, we are clearly at a fundamentally different place in the economic cycle. The Covid-19 lockdowns have placed an unprecedented strain on corporate earnings, and with the S&P solidly above 3,000 in today's wild trading, that earnings depredation is not reflected in the average's P/E.
I have quoted the work of John Butters of FactSet many times in my RM column and, as usual, he has the perfect factoid for this market. In the first five months of 2020, consensus earnings estimates for the S&P 500 fell 28.0%. That decline actually exceeds the figure for the first five months of 2009, which FactSet's data pegged at 26.4%.
So we're looking at a bigger hit to corporate earnings than from the Great Financial Crisis, but the S&P 500 is basically flat for the year and the Nasdaq has posted a gain in the high-single digits. That does not compute. Especially since Covid-19's economic damage really began in late-January in China and late-February for the rest of the world. Lehman blew up on September 15, 2008, so the market has had much less time to process the root cause of this earnings collapse on June 12, 2020 than it had on June 12, 2009.
What to do? Act like King Canute and run outside my office and yell at the boarded-up windows of Fifth Avenue --another factor that is detrimental to corporate earnings, at least in the retail space -- "it's too high." No, that's a waste of time. I am an active asset manager, so I chose instead to actively manage assets.
I started a new portfolio for my firm, Excelsior Capital Partners. It is composed of 10 names that I have shorted, plus one long name to ballast that. For that I chose Euronav (EURN) , one of my favorite oil tanker shippers and one that is about to pay a quarterly dividend that equates to 8.1% (not a typo) of my in-price of $9.95 per share. I'll have a head start, at least on a cash flow basis, when that dividend is paid on June 26th. The key to running a short fund is, not surprisingly, picking stocks that will fall.
This week has been a colorful one for the ExCap Short Portfolio with Tesla (TSLA) rocketing and then selling off after dual downgrades form Morgan Stanley and Goldman Sachs in the past 24 hours, and four of the names - (ESRT) , (AAL) , (C) and (BA) - posting double-digit percentage declines in the first week. I am fading the names that have moved the most in hopes of a v-shaped recovery for the global economy. So far it is working, as I am up 4.2% in the first week.
Here is the full list of my short portfolio with one Long name.
Short (equal weights)